Permanent and Transitory Price Shocks in Commodity Futures Markets and Their Relation to Storage and Speculation

This paper takes an innovative look at the relationship between the pricing of commodity futures contracts and its relation to storage and speculation. Fifteen commodities are analyzed over the time period from 1990 to 2010. Contrary to other studies, we analyze temporary and permanent futures price innovations in a cointegrated system of pairwise short- and long-dated contracts. The innovations are used to perform Granger causality tests with respect to the level of net speculation and changes in inventories. Our findings can be summarized as follows: first, where cointegration is observed, the permanent shocks of the system are determined by the long-dated contract, while the adjustment towards equilibrium is restored by the short-dated contract. Second, we do no find evidence that speculation has statistically significant effects on permanent or transitory price shocks. Under the assumption that speculation occurs mainly in short-dated contracts, the finding is inconsistent with the common presumption that speculation has permanent effects on the price formation process. Third, temporary futures price distortions are largely absorbed by adjustments in inventories, while permanent price shocks affect inventories only in a few cases